Summary Of Significant Accounting Policies | 12 Months Ended |
Dec. 31, 2014 |
Summary Of Significant Accounting Policies [Abstract] | |
Summary Of Significant Accounting Policies | 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
Organization |
Sanchez Production Partners LLC (SPP, we, us, our or the Company) (formerly Constellation Energy Partners LLC) was organized as a limited liability company on February 7, 2005, under the laws of the State of Delaware. We completed our initial public offering on November 20, 2006, and currently trade on the NYSE MKT LLC (NYSE MKT) under the symbol “SPP”. We are currently focused on the acquisition, development and production of oil and natural gas properties and other integrated assets. Our proved reserves are currently located in the Cherokee Basin in Oklahoma and Kansas, the Woodford Shale in the Arkoma Basin in Oklahoma, the Central Kansas Uplift in Kansas and in Texas and Louisiana. |
Through subsidiaries Sanchez Oil & Gas Corporation (SOG) owns a portion of our outstanding units. As of December 31, 2014, Sanchez Energy Partners I, LP (SEP I), a subsidiary of SOG, owned 484,505, or 100%, of our Class A units and 5,364,196, or 18.6%, of our Class B common units. |
On October 3, 2014, Constellation Energy Partners LLC (CEP) changed its name to Sanchez Production Partners LLC. The name change was effected pursuant to Section 18-202 of the Delaware Limited Liability Company Act (the DLLCA) by filing a Fourth Certificate of Amendment to Certificate of Formation with the Secretary of State of the State of Delaware. Under the DLLCA and the Company’s Second Amended and Restated Operating Agreement, as amended, the name change did not require approval of the Company’s unitholders. |
On August 25, 2014, our board of managers approved a plan of conversion providing for the conversion of the Company from a limited liability company organized under the laws of the State of Delaware to a limited partnership organized under the laws of the State of Delaware. Pursuant to the plan of conversion, at the effective time of the conversion, each outstanding common unit of the Company will be converted onto one unit of Sanchez Production Partners LP (Sanchez LP), the outstanding Class A units of the Company will be converted into common units of Sanchez LP in a number equal to 2% of the Sanchez LP common units outstanding immediately after the conversion (after taking into account the conversion of the Class A units) and the outstanding Class Z unit will be cancelled. In addition, a SOG-related company will become the general partner of Sanchez LP, and incentive distribution rights will be issued by Sanchez LP to another SOG-related company. On January 30, 2015, the Company received a Notice of Effectiveness from the SEC regarding its registration statement on Form S-4 with respect to the common units of Sanchez LP to be issued to the Company’s common unitholders and the Class A unitholder in connection with the conversion. A special meeting of the Company’s unitholders will be held on March 6, 2015 to vote on the plan of conversion and an amendment and restatement of the Constellation Energy Partners LLC 2009 Omnibus Incentive Compensation Plan as the Sanchez Production Partners LP Long-Term Incentive Plan. |
On June 26, 2014, we settled the lawsuit brought by Constellation Energy Partners Holdings, LLC (CEPH), a subsidiary of Exelon Corporation, against us in the Court of Chancery of the State of Delaware (the Exelon Litigation). In conjunction with the settlement, we paid CEPH $1.65 million in exchange for all of the Class C management incentive interests and Class D interests held by CEPH, which were all of such interests issued by SPP. Effective with the acquisition of these interests from CEPH, we cancelled the Class C management incentive interests and Class D interests. |
On May 8, 2014, the Company and SP Holdings, LLC (the Manager), a SOG-related company, entered into a Shared Services Agreement (the Services Agreement) pursuant to which, as of July 1, 2014, the Manager provides services that the Company requires to operate its business, including overhead, technical, administrative, marketing, accounting, operational, information systems, financial, compliance, insurance, professionals and acquisition, disposition and financing services. |
Basis of Presentation |
Accounting policies used by us conform to accounting principles generally accepted in the United States of America. The accompanying financial statements include the accounts of us and our wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. We operate our oil and natural gas properties as one business segment: the exploration, development and production of oil and natural gas. Our management evaluates performance based on one business segment as there are not different economic environments within the operation of our oil and natural gas properties. |
Use of Estimates |
Estimates and assumptions are made when preparing financial statements under accounting principles generally accepted in the United States of America. These estimates and assumptions affect various matters, including: |
•reported amounts of revenue and expenses in the Consolidated Statements of Operations during the reported periods, |
•reported amounts of assets and liabilities in the Consolidated Balance Sheets at the dates of the financial statements, |
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•disclosure of quantities of reserves and use of those reserve quantities for depreciation, depletion and amortization, and |
•disclosure of contingent assets and liabilities at the date of the financial statements. |
These estimates involve judgments with respect to numerous factors that are difficult to predict and are beyond management’s control. As a result, changes in facts and circumstances or additional information may result in revised estimates or actual amounts may materially differ from these amounts. |
Reclassifications |
Certain reclassifications have been made to the prior periods to conform to the current period presentation. These reclassifications had no effect on total assets, total liabilities, total unitholders’ equity, net income or net cash provided by or used in operating, investing or financing activities. |
Discontinued Operations |
In February 2013, we sold all of our Robinson’s Bend Field assets in the Black Warrior Basin of Alabama. The related results of operations and cash flows have been classified as discontinued operations in the consolidated statements of operations, balance sheets, statements of cash flows and consolidated financial information. Unless otherwise indicated, information presented in the Notes to Consolidated Financial Statements relates only to the Company’s continuing operations. Information related to discontinued operations is included in Note 2. Discontinued Operations. |
Cash and Cash Equivalents |
All highly liquid investments with original maturities of three months or less are considered cash equivalents. Checks-in-transit are included in accounts payable in our consolidated balance sheets. There were no checks-in-transit as of December 31, 2014 and 2013. |
Restricted Cash |
Restricted cash at December 31, 2014 and 2013 of $1.7 million was held in escrow in relation to the sale of the Robinson’s Bend Field assets and related to litigation involving one of our service providers. |
Concentration of Credit Risk and Accounts Receivable |
Financial instruments that potentially subject us to a concentration of credit risk consist of cash and cash equivalents, accounts receivable and derivative financial instruments. We place our cash with high credit quality financial institutions. We place our derivative financial instruments with financial institutions that participate in our reserve-based credit facility and maintain an investment grade credit rating. Substantially all of our accounts receivables are due from purchasers of oil and natural gas. These sales are generally unsecured and, in some cases, may carry a parent guarantee. As we generally have fewer than 10 large customers for our oil and natural gas sales, we routinely assess the financial strength of our customers. Bad debt expense is recognized on an account-by-account review and when recovery is not probable. Our allowance for doubtful accounts was $0.2 million during 2014 and less than $0.1 million in 2013. We have no off-balance-sheet credit exposure related to our operations or customers. |
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For the year ended December 31, 2014, five customers accounted for approximately 33%, 30%, 16%, 14% and 7% of our sales revenues. For the year ended December 31, 2013, five customers accounted for approximately 22%, 20%, 17%, 14% and 8% of our sales revenues. |
Oil and Natural Gas Properties |
Oil and Natural Gas Properties |
We follow the successful efforts method of accounting for our oil and natural gas exploration, development and production activities. Leasehold acquisition costs, property acquisition and the costs of development of proved areas are capitalized. If proved reserves are found on an undeveloped property, leasehold cost is transferred to proved properties. Under this method of accounting, costs relating to the development of proved areas are capitalized when incurred. |
Accounting rules require that we price our oil and natural gas proved reserves at the preceding twelve-month average of the first-day-of-the-month reference prices as adjusted for location and quality differentials. Such SEC-required prices are utilized except where different prices are fixed and determinable from applicable contracts for the remaining term of those contracts. Our proved reserve estimates exclude the effect of any derivatives we have in place. |
Depreciation, Depletion and Amortization |
Depreciation and depletion of producing oil and natural gas properties is recorded at the field level, based on the units-of-production method. Unit rates are computed for unamortized drilling and development costs using proved developed reserves and for unamortized leasehold costs using all proved reserves. Acquisition costs of proved properties are amortized on the basis of all proved reserves, developed and undeveloped, and capitalized development costs (including wells and related equipment and facilities) are amortized on the basis of proved developed reserves. It has been our historical practice to use our year-end reserve report to adjust our depreciation, depletion, and amortization expense for the fourth quarter. Depreciation, depletion, and amortization expense is calculated using year-end reserve reports based on the SEC-required price. As more fully described in Note 15, proved reserves estimates are subject to future revisions when additional information becomes available. |
Asset Retirement Obligation |
As described in Note 11, estimated asset retirement costs are recognized when the asset is acquired or placed in service, and are amortized over proved developed reserves using the units-of-production method. Asset retirement costs are estimated by our engineers using existing regulatory requirements and anticipated future inflation rates. |
Unsuccessful Wells |
Geological, geophysical and dry hole costs on oil and natural gas properties relating to unsuccessful exploratory wells are charged to expense as incurred. |
Impairment |
Oil and natural gas properties are reviewed for impairment when facts and circumstances indicate that their carrying value may not be recoverable. We assess impairment of capitalized costs of proved oil and natural gas properties by comparing net capitalized costs to estimated undiscounted future net cash flows using expected prices. If net capitalized costs exceed estimated undiscounted future net cash flows, the measurement of impairment is based on estimated fair value, which would consider estimated future discounted cash flows. The cash flow estimates are based upon third party reserve reports using future expected oil and natural gas prices adjusted for basis differentials. Cash flow estimates for the impairment testing exclude derivative instruments. Refer to Note 7 for additional information. |
Significant unproved properties are assessed for impairment individually, and valuation allowances against the capitalized costs are recorded based on the estimated economic chance of success and the length of time that we expect to hold the properties. Properties that are not individually significant are aggregated by groups and amortized based on development risk and average holding period. The valuation allowances are reviewed at least annually. |
Property acquisition costs are capitalized when incurred. |
Support Equipment and Facilities |
Support equipment and facilities consist of certain of our water treatment facilities, gathering lines, roads, pipelines and other various support equipment. Items are capitalized when acquired and depreciated using the straight-line method over the useful life of the assets. |
Materials and Supplies |
Materials and supplies consist of well equipment, parts and supplies. They are valued at the lower of cost or market, using either the specific identification or first-in first-out method, depending on the inventory type. Materials and supplies are capitalized as used in the development or support of our oil and natural gas properties. |
Oil, Natural Gas and Natural Gas Liquids Reserve Quantities |
Our estimate of proved reserves is based on the quantities of oil, natural gas and natural gas liquids that engineering and geological analyses demonstrate, with reasonable certainty, to be recoverable from established reservoirs in the future under current operating and economic parameters. Proved reserves are calculated based on various factors, including consideration of an independent reserve engineers’ report on proved reserves and an economic evaluation of all of our properties on a well-by-well basis. The process used to complete the estimates of proved reserves at December 31, 2014 and 2013 is described in detail in Note 15. |
Reserves and their relation to estimated future net cash flows impact depletion and impairment calculations. As a result, adjustments to depletion and impairments are made concurrently with changes to reserve estimates. The accuracy of reserve estimates is a function of many factors including the following: the quality and quantity of available data, the interpretation of that data, the accuracy of various mandated economic assumptions and the judgments of the individuals preparing the estimates. |
Proved reserve estimates are a function of many assumptions, all of which could deviate significantly from actual results. As such, reserve estimates may materially vary from the ultimate quantities of oil and natural gas eventually recovered. |
Derivatives and Hedging Activities |
We use derivative financial instruments to achieve a more predictable cash flow from our oil and natural gas production by reducing our exposure to price fluctuations. Additionally, we use derivative financial instruments in the form of interest rate swaps to mitigate interest rate exposure on our borrowings under our reserve-based credit facility. |
We account for all our open derivatives as mark-to-market activities. All derivative instruments are recorded in the consolidated balance sheet as either an asset or a liability measured at fair value with changes in fair value recognized in earnings. All of our open derivatives are effective as economic hedges of our commodity price or interest rate exposure. These contracts are accounted for using the mark-to-market accounting method. Using this method, the contracts are carried at their fair value on our consolidated balance sheets under the captions “Risk management assets” and “Risk management liabilities.” We recognize all unrealized and realized gains and losses related to these contracts on our consolidated statements of operations under the caption “Oil sales” or “Natural gas sales” and settled interest rate swaps as “Interest expense.” |
Revenue Recognition |
Sales are recognized when oil, natural gas and natural gas liquids have been delivered to a custody transfer point, persuasive evidence of a sales arrangement exists, the rights and responsibility of ownership pass to the purchaser upon delivery, collection of revenue from the sale is reasonably assured and the sales price is fixed or determinable. Oil, natural gas and natural gas liquids are generally sold on a monthly basis. Most of the contracts’ pricing provisions are tied to a market index, with certain adjustments based on, among other factors, whether a well delivers to a specific tank battery, gathering or transmission line, quality of oil, natural gas and natural gas liquids, and prevailing supply and demand conditions, so that the price of the oil, natural gas and natural gas liquids fluctuates to remain competitive with other available oil, natural gas and natural gas liquids supplies. As a result, revenues from the sale of oil, natural gas and natural gas liquids will suffer if market prices decline and benefit if they increase. We believe that the pricing provisions of our oil, natural gas and natural gas liquids contracts are customary in the industry. |
Gas imbalances occur when sales are more or less than the entitled ownership percentage of total gas production. We use the entitlements method when accounting for gas imbalances. Any amount received in excess is treated as a liability. If less than the entitled share of the production is received, the excess is recorded as a receivable. There was only a minimal gas imbalance position on one of our wells in the Mid-continent region at December 31, 2014. There were no gas imbalance positions at December 31, 2013. |
Income Taxes |
SPP and each of its wholly-owned subsidiary LLCs are treated as a partnership for federal and state income tax purposes. All of our taxable income or loss, which may differ considerably from net income or loss reported for financial reporting purposes, is passed through to the federal income tax returns of our members. As such, no federal income tax for these entities has been provided for in the accompanying financial statements. SPP is subject to franchise tax obligations in Kansas and Texas and state tax obligations in Alabama and Oklahoma. SPP also has informational filing requirements in Georgia, Indiana, Louisiana, Maine, Missouri, New Jersey, New York, Oregon, Pennsylvania, and West Virginia because we have resident unitholders in these states. |
Our wholly-owned subsidiary, CEP Services Company, Inc. is a taxable entity. For the years ended December 31, 2014, and 2013, the current and deferred income taxes for the entity were immaterial. The entity has no material deferred tax assets or liabilities. |
Earnings per Unit |
Basic earnings per unit (EPU) is computed from the two-class method by dividing net income (loss) attributable to unitholders by the weighted average number of units outstanding during each period. To determine net income (loss) allocated to each class of ownership (Class A and Class B), we first allocate net income (loss) in accordance with the amount of distributions made for the period by each class, if any. The remaining net income (loss) is allocated to each class in proportion to the class weighted average number of units outstanding for the period, as compared to the weighted average number of units for all classes for the period. |
As of December 31, 2014 and 2013, we had unvested restricted common units outstanding, which were considered dilutive securities. These units will be considered in the diluted weighted average common units outstanding number in periods of net income. In periods of net losses, these units are excluded for the diluted weighted average common unit outstanding number as they are not participating securities. |
The following table presents our calculation of basic and diluted units outstanding for the periods indicated: |
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| | Year Ended December 31, | | | |
| | 2014 | | 2013 | | | |
Weighted average units outstanding during period: | | | | | | | | | |
Class A units - Basic | | | 763,261 | | | 933,613 | | | |
Class B Common units - Basic | | | 28,431,586 | | | 25,210,106 | | | |
| | | 29,194,847 | | | 26,143,719 | | | |
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Weighted average units outstanding during period: | | | | | | | | | |
Class A units - Diluted | | | 763,261 | | | 933,613 | | | |
Class B Common units - Diluted | | | 28,532,411 | | | 25,210,106 | | | |
| | | 29,295,672 | | | 26,143,719 | | | |
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At December 31, 2014, we had 100,825 Class B common units that were restricted unvested common units granted and outstanding. These units were included in the diluted weighted average common units outstanding number since we recognized net income for the period. At December 31, 2013, we had 380,327 Class B common units that were restricted unvested common units granted and outstanding. These units were excluded from the diluted weighted average common units outstanding number since we recognized a net loss for the year. |
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The following table presents our basic and diluted income per unit for the year ended December 31, 2014 (in thousands, except for per unit amounts): |
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| | Total | | Class A Units | | Class B Units |
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Income from continuing operations | | $ | 9,503 | | | | | | |
Distributions | | | - | | $ | - | | $ | - |
Assumed allocation of income from continuing operations | | | 9,503 | | | 190 | | | 9,313 |
Discontinued operations | | | - | | | - | | | - |
Assumed net income to be allocated | | $ | 9,503 | | $ | 190 | | $ | 9,313 |
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Basic and diluted income from continuing operations per unit | | | | | $ | 0.25 | | $ | 0.33 |
Basic and diluted income from discontinued operations per unit | | | | | $ | - | | $ | - |
Basic and diluted income per unit | | | | | $ | 0.25 | | $ | 0.33 |
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The following table presents our basic and diluted income per unit for the year ended December 31, 2013 (in thousands, except for per unit amounts): |
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| | Total | | Class A Units | | Class B Units |
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Loss from continuing operations | | $ | -25,857 | | | | | | |
Distributions | | | - | | $ | - | | $ | - |
Assumed allocation of loss from continuing operations | | | -25,857 | | | -517 | | | -25,340 |
Discontinued operations | | | -2,686 | | | -53 | | | -2,633 |
Assumed net loss to be allocated | | $ | -28,543 | | $ | -570 | | $ | -27,973 |
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Basic and diluted loss from continuing operations per unit | | | | | $ | -0.55 | | $ | -1.01 |
Basic and diluted loss from discontinued operations per unit | | | | | $ | -0.06 | | $ | -0.1 |
Basic and diluted loss per unit | | | | | $ | -0.61 | | $ | -1.11 |
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Environmental Cost |
We record environmental liabilities at their undiscounted amounts on our balance sheets in other current and long-term liabilities when our environmental assessments indicate that remediation efforts are probable and the costs can be reasonably estimated. Estimates of our environmental liabilities are based on currently available facts, existing technology and presently enacted laws and regulations taking into consideration the likely effects of other societal and economic factors, and include estimates of associated legal costs. These amounts also consider prior experience in remediating contaminated sites, other companies’ clean-up experience and data released by the Federal Environmental Protection Agency (EPA) or other organizations. Our estimates are subject to revision in future periods based on actual costs or new circumstances. We capitalize costs that benefit future periods and we recognize a current period charge in operation and maintenance expense when clean-up efforts do not benefit future periods. At December 31, 2014, we had no environmental liabilities recorded, as no liabilities were deemed necessary. |
Unit-Based Compensation |
We record compensation expense for all equity grants issued under the Long-Term Incentive Program and the 2009 Omnibus Incentive Compensation Plan based on the fair value at the grant date, recognized over the vesting period. |
Other Contingencies |
We recognize liabilities for other contingencies when we have an exposure that, when fully analyzed, indicates it is both probable that an asset has been impaired or that a liability has been incurred and the amount of impairment or loss can be reasonably estimated. Funds spent to remedy these contingencies are charged against the associated reserve, if one exists, or expensed. When a range of probable loss can be estimated, we accrue the most likely amount or at least the minimum of the range of probable loss. |
Recent Pronouncements and Accounting Changes |
From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (the FASB), which are adopted by us as of the specified effective date. Unless otherwise discussed, management believes that the impact of recently issued standards, which are not yet effective, will not have a material impact on our consolidated financial statements upon adoption. |
In April 2014, the FASB issued Accounting Standards Update (ASU) No. 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. This guidance changes the definition of a discontinued operation to include only those disposals of components of an entity that represent a strategic shift that has or will have a major effect on an entity’s operations and financial results. This guidance is effective prospectively for fiscal years beginning after December 15, 2014. The effects of this accounting standard on our financial position, results of operations and cash flows will not be material. |
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). This guidance outlines a new, single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. This new revenue recognition model provides a five-step analysis in determining when and how revenue is recognized. The new model will require revenue recognition to depict the transfer of promised goods or services to customers in an amount that reflects the consideration a company expects to receive in exchange for those goods and services. The new guidance may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as of the date of initial application. We are currently in the process of evaluating the impact of adoption of this guidance on our consolidated financial statements, but do not expect the impact to be material. |
In August 2014, the FASB issued ASU No. 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. This guidance creates a new subtopic ASC 205-40, “Presentation of Financial Statements – Going Concern,” and provides guidance about management’s responsibility to evaluate whether there is a substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. The requirements in this guidance are effective for the annual period ending after December 15, 2016, which is fiscal 2017 for us, and for annual and interim periods thereafter. Early application is permitted. We acknowledge this new guidance and will comply with the disclosure requirements, if applicable, beginning in fiscal 2017. The adoption of this guidance will have no material impact on our financial position, results of operations or cash flows. |
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